Argentina's beaten-down bonds: A bargain cries out

Source: ReutersBy: Raul Gallegos

05.24.2012

President Cristina Fernandez’s policies, such as increased currency controls, do warrant some knock-on effects on the country’s debt. But that’s surely not enough to justify Argentina’s bonds being regarded as riskier than Venezuela’s. After all, President Hugo Chavez is easily the region’s top property rights violator.

Yet Ms. Fernandez’s anticipated YPF grab – which finally occurred last month – reversed an almost two-year trend of Argentina’s debt outperforming Venezuela’s. It’s the same story with 10-year credit default swaps. The spread on Argentina’s CDS has shot up almost 50 per cent this year. It now costs $3.3-million (U.S.) to insure against a default on $10-million of Argentina’s bonds, compared with $2.5-million in Venezuela’s case.

Meanwhile, Argentina’s benchmark Boden 2015 bonds now sell for 80 cents on the dollar. That offers a 15 per cent yield. Even financially strapped Spain hasn’t plunged that far; its debt doesn’t even yield 5 per cent.

That would all make sense if Argentina were a fiscal mess. But at $185-billion, the country’s total debt load last year equated to just 41.3 per cent of GDP. That’s better than both Spain, whose debt-to-GDP ratio stood at 70 per cent, and Italy, which is saddled with an eye-popping 120 per cent burden. Moreover, with GDP growth at 4 per cent and funds available from central bank reserves, pension funds and YPF’s coffers, Argentina has ample cash.

That means the only way a default should occur is if Ms. Fernandez for some reason chose to pull the trigger. That’s unlikely in any event. But it also ignores two key points. First, a default would make little sense financially or politically as nearly half of Argentina’s total outstanding debt is in the hands of Argentine government institutions.

Second, there’s a method to Ms. Fernandez’s economic shenanigans. Her unorthodox policies are generally aimed at boosting her popularity. Defaulting on the country’s debt wouldn’t win her any applause, especially with congressional elections slated for 2013. Argentina’s shameless politicians make for bad headlines, but smart investors should ignore the noise and spot a bargain.